Military borrowers looking to buy or refinance a home might want to consider a VA loan. Backed by the U.S. Department of Veterans Affairs (VA), this loan option can make buying a home easier for those who might otherwise struggle to afford a mortgage.
While VA loans have a funding fee that borrowers need to pay, they also come with a range of benefits, such as not requiring a down payment. If you’re a current or former service member, here’s everything you need to know about VA loans.
A VA loan is a new home loan or refinance loan offered through private lenders, such as banks and credit unions, in which a portion of the loan is guaranteed by the Department of Veterans Affairs. Since it’s backed by the federal government, lenders consider it a less risky loan than a conventional mortgage.
VA loans are available to those who have served in the military and, in some cases, spouses and of military personnel. You can secure either a fixed-rate or adjustable-rate VA loan.
For those who qualify, a VA loan may offer the most affordable path to homeownership. It carries several benefits, including low mortgage rates. Locking in a lower rate can save you tens of thousands of dollars in interest over the lifetime of your home loan.
The average interest rate for a VA loan is generally lower than the rate for a conventional loan — and often even lower than a Federal Housing Administration (FHA) loan. Right now, 30-year VA rates hover just above 5%, while conventional and FHA loans APRs are closer to 6%.
In addition, VA loans have no down payment requirements, which can make it easier for many lower-income Americans to afford a home. According to the National Association of Realtors (NAR), the average down payment in the U.S. is 7% of the home loan for first-time home buyers and 17% for repeat buyers. If you’re purchasing a $300,000 house, that’s $21,000 to $51,000, respectively — a sum of money that can be difficult to pull together.
Another perk of a VA loan is that it does not require mortgage insurance. Most home loans require you to purchase some type of mortgage insurance if you put less than 20% down, which increases your monthly mortgage payment. A VA loan does not require this additional expense.
VA loans also have minimal property requirements, which means you’re more likely to secure the home you want with this type of mortgage. This loan option also has no set credit score requirements, though individual lenders may have their own requirements.
There are a few different classes of individuals who might be eligible for a VA loan.
You can apply for a VA loan if you are:
You may be able to apply for a VA loan if you are:
Although a VA loan does not require a down payment or purchase of mortgage insurance, it does have an origination fee. This fee changes each year. For 2022, new home buyers will pay a 2.3% funding fee for a VA loan, while repeat home buyers will pay 3.6%. If you do decide to make a down payment, this fee may decrease.
If you’re worried about paying this fee upfront, however, you should know that most lenders let you roll this amount into your home loan — so you won’t have to pay this sum at once.
The only other major drawback to a VA loan is the eligibility requirements.
To apply for a VA loan, you’ll need to have a few things in hand. Like most home loans, you’ll need a few key financial and personal documents. This could include:
With a VA loan, you also have to provide documentation of your military service (or your spouse's). To do this, you’ll need to obtain a Certificate of Eligibility (COE) from the VA. You can apply for your COE through the VA’s eBenefits portal or from the VA by mail. In some cases, your lender may be able to use an online system (Web LGY) to obtain your COE.
If you’re ready to buy a home and have decided a VA loan is right for you, here are the steps you’ll follow to start the mortgage application process.
Not all lenders offer VA loans — only those approved by the Department of Veterans Affairs. To get started, you’ll want to compare VA-approved lenders to find those with the rates and loan terms that best fit your needs.
You can find a list of eligible lenders by talking to your real estate agent or by searching online. Veteran.com offers a list of some of the top VA lenders nationwide. That said, there may be locally approved lenders in your area worth reviewing.
Once you select a lender, you’ll want to obtain and submit your COE.
This step is optional but can help you stand out to prospective sellers — especially in a housing market as temperamental as the current one. Getting preapproved is not the same as getting prequalified. While prequalification gives you a good indication of how much you’re likely to be approved for, preapproval goes another step further.
When you apply for preapproval, the lender you choose will verify your financial and personal documents and check your credit history — in addition to offering you an amount you’re likely to be approved for when financing a home.
Getting preapproved is helpful because it can turn up any unexpected errors on your credit report that you may need to correct before buying. It also shows sellers that you’re serious about buying a home, and it can help you stand out if you’re facing strong competition in your local market.
Now comes the fun part. Once you know how much home you can finance, consult your budget to determine your ideal price range, then start shopping. It can be helpful to work with a buying agent — particularly one with VA loan experience — to show you homes as soon as they hit the market and help find properties that meet your criteria.
Once you’ve found a home that checks all your boxes, it’s time to make an offer. A real estate agent can help negotiate on your behalf and may even be able to get the seller to foot some of your VA loan fees.
If the seller accepts your offer, you’ll sign a purchase agreement and move forward in the home-buying process.
The signed purchase agreement is generally the last step in your loan application process, but check with your lender to make sure they have all of the documents they need to move forward with your application.
From here, you’ll move into the closing stage, and your lender will issue an appraisal. You can have the home inspected, and you’ll purchase title insurance. If all goes well, you'll be handed the keys to your new home. This process varies by applicant, but expect it to take a minimum of 30 days.
A VA loan is considered one of the best mortgage options available. If eligible, you can eliminate your need for a down payment, and may be able to lock in a lower interest rate compared to other mortgage types. That said, it’s always recommended that you shop around for the best mortgage rates and terms.
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